Bitcoin shunned by big banks as Mt Gox halts dollar payouts

The world's best-known Bitcoin exchange stopped paying out
customers in US dollars on 20 June. Mt. Gox didn't exactly explain
what was going on, though. It blamed an
"increased volume" of transactions, and said it would suspend US
cash withdrawals for two weeks as it sorted things out.

The issue "is with processing the sheer volume through our banks
in Japan, which is causing a delay," said Mt. Gox's Thomas
Glucksmann-Smith in an email message. "We are currently attempting
to improve our services for this. In the meantime USD deposits are
unaffected as are other currencies."

But the Japanese company has fallen afoul of regulators and is
clearly under pressure in the US

The suspension comes a month after the Department of Homeland
Security froze a Wells Fargo account that Mt. Gox had been using to
pay US funds to the Dwolla mobile payment service. When it set up
the account, Mt. Gox had failed to properly identify itself as a
money transmitting business, a violation of US
anti-money-laundering regulations, the DHS said.

And that, according to some observers, has made it radioactive
to US banks.

These regulatory problems have almost certainly caused some
banks to shy away from doing business with Mt. Gox, says Larry De
Palma, the CEO of TDG-Phenix, a financial services consultancy that
focuses on payments. That's causing a serious liquidity problem
when it comes to trading other currencies into US dollars. "They
can't go out and trade or cover trades," he says.

But that's not behind the suspension of cash withdrawals,
according to Glucksmann-Smith. "This has nothing to do with the US
Banks."

It may be that Mt. Gox is simply going through additional hoops
to fix a technical problem or reassure its current banker, but the
fact that the exchange has already run afoul of regulators is
certain to make banks nervous, says Will Voorhees the director of
the financial intelligence unit with Silicon Valley Bank.

DePalma puts it this way: "Banks are already bogged down
with Dodd-Frank,"
he says. "They don't even know what the US dollar is doing, let
alone a virtual currency."

In March, the federal agency responsible for enforcing the
nation's anti-money-laundering laws, the Treasury Department's
Financial Crimes Enforcement Network, spelled out what exchanges
like Mt. Gox must do in order to stay in the good graces of US
regulators. Although some have said that the regulations are
confusing and inappropriate for small businesses (for example,
coffee shops that give cash back in exchange for Bitcoins
technically must also register as money transmitters) the FinCEN's
director says they were designed to take virtual currencies such as
bitcoin to the next level. "I will not deny that there are some
troublesome providers out there," said FinCen director Jennifer
Shasky Calvery, according to a transcript
of a speech she gave in Washington on 13 June. "But, that
is balanced by a recognition of the innovation these virtual
currencies provide."

Nevertheless, some think the government is cracking down on
virtual currencies. In May federal prosecutors shut down another
digital currency network, Liberty Reserve, and charged its founder with money laundering.

Bitcoin is different. Unlike Liberty Reserve, it works on a
peer-to-peer network that isn't controlled by anyone. It operates
as a much more transparent digital currency where money transfers
can be tracked in public -- even if the names of the people doing
the transactions are kept secret. But nevertheless, US banks are
nervous. In the past month two other Bitcoin companies, Bitspend
and Bitfloor, have also had accounts shut down by US banks.
Bitfloor, a Bitcoin exchange, is now out of business.

Bitspend is a website that helps you spend Bitcoins on sites
that do not accept them. It says that Chase froze its account in order to figure out
if its money was coming from legitimate sources. "So because we
have money coming in from Bitcoin exchanges, we are now a criminal
and have had all our money seized," company founder Justin Whelchel
wrote in exasperation on Reddit on 19 June.

The problem is that US banks are afraid that doing business with
Bitcoin companies might draw the attention of US or state
regulators, Voorhees says. Although unrelated to Bitcoin, last
month's shutdown of Liberty Reserve, contributed to this sense of
unease. "I've been in this space for 10 years and I can tell you
that I've never seen a more visceral reaction to an industry than
the way I've seen banks respond to the digital currency industry,"
he says.

Because regulators are not on board, "the downside of dealing
with the companies using/selling/brokering is much greater than any
possible upside (fees)," wrote one commentor on the Bankers Online discussion
board, on 18 June.

This reluctance may be fed by the sense that Bitcoin poses a
threat to the banking industry. Anyone can transfer Bitcoins
anywhere for free and that could put a dent in some banking
transaction processing fees.

But Silicon Valley Bank sees money to be made in Bitcoins.
There's been a mini-boom in Bitcoin startups over the past year,
for example, as Bay Area venture capitalists have moved in. "We've
built out a really robust onboarding process and then an ongoing
monitoring process so that we can bring them in safely and make
sure that they live up to our standards," Voorhees says.